Traders are the most sensitive, betting on a 50 basis point rate cut in September, which is exciting news! As long as the rate cut, the big bull market will come!
Traders start betting on a 50 basis point rate cut by the Federal Reserve in September
Bond traders are increasing their bets that the Federal Reserve will cut interest rates by 50 basis points in September, rather than the standard 25 basis points.
This was evident in the federal funds futures market, where softer-than-expected CPI inflation data released Thursday morning triggered a wave of buying for October contracts, which continued on Friday. These contracts expire on October 31, and their prices have fully reflected the expectation of a 25 basis point rate cut by policymakers at the September 18 meeting.
Futures open interest data from CME Group Inc. showed that buying on Thursday triggered new risk, with trading volume just under 260,000 contracts, a record high for October contracts. Buying interest remained high on Friday.
Any buying at higher levels implies an expectation that more people will believe that the Fed may start its first easing cycle in years with an outsized move.
"There is a good chance that the Fed will cut rates in September," Marilyn Watson, head of global fundamental fixed income strategy at BlackRock Inc., said on Bloomberg TV. While she expects the Fed to cut by 25 basis points, she said, "We think they may start in July."
The above positions would also benefit if expectations for 25 basis point cuts on both July 31 and September 18 increase, but traders gave up hopes for a July rate cut several weeks ago and no major Wall Street bank is predicting a rate cut.
Market expectations for Fed policy changed little on Friday as the producer price (PPI) report, while higher than expected, had little impact compared to the weak CPI report released last Thursday.
The swap contracts, whose settlement value is determined by the Fed’s policy decisions, fully price in a 25 basis point rate cut in September and a total of 60 basis points by year-end, implying two 25 basis point cuts and a 40% chance of a third.
